Banks Will Be Able to Use Packaged Auto and Consumer Loans to Meet Liquidity Requirements

BRUSSELS—European banks will be able to use packaged auto and consumer loans and other types of securitized debt to meet requirements that they hold a certain proportion of assets that can easily be converted into cash, according to new rules published Friday.

Under rules aimed at reducing the likelihood and impact of bank failures, European banks are required to hold about 10% of their balance sheet in liquid assets.

The European Commission, the European Union’s executive arm, said that high-quality securitizations could count for up to 15% of banks’ liquidity buffers.

It also outlined the qualification criteria for securitized financial instruments that could be used to fulfill the liquidity requirements. This is a larger group than listed by the Basel Committee on Banking Supervision, the Switzerland-based body that sets global banking rules, which allows only residential mortgage-backed securities to count toward banks’ liquidity buffers.

Securitization, the practice of bundling loans into securities and selling them as bonds, were heavily criticized during the financial crisis, when it was held responsible for encouraging reckless lending decisions by banks.

According to the commission’s rules, which begin to take effect next October, eligible securities could be backed by debt such as car loans, residential loans, credit-card receivables and small-business loans. They would also have to be backed by the most creditworthy assets, and in packages of at least €100 million.

EU policy makers have said high-quality securitization would encourage companies to seek funding from financial markets instead of banks.

The new rules “show that Europe is serious about creating a framework to support investment in the economy, particularly through promoting safe and transparent securitization and encouraging insurers to invest for the long term,” said
Michel Barnier,
the EU financial-services commissioner .

Jonathan Hill,
the British commissioner tapped to become Mr. Barnier’s successor, told the European Parliament this week that securitization “when properly framed, can contribute to unlock funds for the financing of the economy.”

The liquidity requirement is meant to provide enough cash or near-cash assets to allow a bank to survive 30 days under stress. It will take effect from Oct. 1, 2016 and be fully phased in at the start of 2018.

The rules on bank liquidity were published alongside another on the solvency of insurance companies, part of a broader overhaul of capital rules for insurers that comes into force in January 2016. The rules published Tuesday were aimed at encouraging insurers to invest more into simple and transparent asset-backed securities.

The proposals will be reviewed by the European Parliament and national governments, which have the power to revoke them.